Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, August 27, 2010

Goldstein Halts the Recovery!!

Paul Krugman is correct: we are NOT in a recovery. In fact, the rock is rolling quickly down the hill as we are about to have a downturn -- in a downturn.

Are policy makers in "denial," as Krugman claims? Hardly. Granted, Washington is booming, just as it did from 1933 to 1946 when government became firmly entrenched in the lives of everyone else and, well, someone had to be paid in order to carry out the "entrenching." No doubt, these people are enjoying good times and even if the rest of the country suffers, those tied to the federal government even are enjoying increased incomes. Life is good, at least in DC.

As usual, Krugman trots out the usual canards for this obvious downturn, including (1) the original "stimulus" was not large enough, and (2) Goldstein The Republican Party is blocking new spending. Let us look at both arguments, which are predicated with the nonsense that Goldstein is to blame. Krugman writes:

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

Let us remember that in 2009, Republicans were in NO position to engage in any "obstructionism." The Senate had a filibuster-proof majority and Nancy Pelosi firmly controlled the House. Obama had come in as a combination of Superman-Messiah, and he was in a position to do whatever he wanted, Republicans be damned.

Yet, once again, Krugman chooses to claim that the government did not take on enough debt and fund enough projects (that somehow would magically have carried us onto a wave of prosperity and four-percent unemployment) to end the recession all because a few Republicans were making noise about spending. This is nonsense, pure nonsense.

Furthermore, Krugman NEVER has laid out the causal chain to explain just how taking on a few hundred billions more in government debt would have placed our economy in the pink. He likes to say that the economy would have gained more "traction," but I would ask just what he means by that. An economy is not a perpetual motion machine, and the idea that throwing in some more dollars would have given the economy enough push to sustain itself lacks an explanation device. Instead, we are supposed to just believe it.

We also see the Silvio Gesell side of Krugman when he urges the Fed to ramp up the inflation in order to "encourage" spending. Krugman writes:

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

Here is the problem: businesses are not just sitting "on their cash" because it makes their bottoms feel good. They have no confidence about the future, and the anti-business rhetoric that comes not only out of the White House, but also from Congress and the media is not exactly going to give business owners and investors more confidence.

So, Krugman resorts to the "trick" of rapidly depleting the value of money in order to encourage spending. However, the problem is that businesses only are engaging in short-term investments when, in fact, we need to see long-term movement in order for a recovery to begin. Unfortunately, that is not possible in this political environment, and instead of recognizing that fact, Krugman calls for financial trickery that, in essence, would be a de facto confiscation of money from those who currently are saving.

None of this trickery and coercion will produce a strong economy. Like all good Keynesians, Krugman is worried only about the shortest-term situation, but if the government continues to follow this current path of financial folly (and even try to make Krugman happy), we won't have to worry about the long run because we really will be dead.

21 comments:

Anonymous
said...

You have a very selective memory over the debate over the stimulus money and the extent of Republican opposition that sent Blue-Dog Democrats into their hole. I suggest you go back and look up some John McCain quotes over bear reproductive studies. But that is really a pointless argument - the real question is whether the stimulus was really to small to deal with the extent of the slump.

Do you really believe that business is sitting on cash because of long-term uncertainty? Or, could it be because they are worried about the lack of demand for their products?

I also believe the causal chain of stimulus has been well argued - from preventing state governments from laying people off, to providing a psychological shock of confidence into markets.

In fact business have engaged in much more long-term behavior - cutting inventories, adapting to a smaller workforce (and thus permanent higher unemployment), and improving their fiscal positions.

In ND, we can't get housing (and the complementary infrastructure built) in the middle of an oil (and coal) boom, so there is a housing shortage. A severe housing shortage.

Why won't developers and banks finance these projects? They all say it is because they are UNCERTAIN about the future... is the EPA or a lame duck congress going to destroy the oil and coal industries???

The fact is, the Democrats had large majorities in both the House and Senate and the Presidency. They could have passed anything they wanted without any Republican votes, and they had roughly one year (Jan 2009 until Jan 2010) to do it.

The size of the stimulus was determined by the President's economic team - at the time, did Romer, Summers, et al argue that it should have been larger? No, they did not.

Vice President Biden later attempted to explain it away by saying that the economic downturn was worse than they had thought. Well, in that case, WTF were you and Obama doing the previous four years in the Senate? Were you paying attention at all?

The Democrats got EXACTLY the stimulus they wanted. Any economist that knew anything about Keynesianism said at that time it wouldn't work, regardless of size. Krugman doesn't know anything about Keynes, he never did any research in that area, his field of expertise was international trade.

So, hang in there, but this stimulus money was wasted, it didn't stimulate anything.

I suppose we can all be thankful that it was as small as it was. The smaller it is, the less harm it can do.

Except, if they had passed the giant waste bucket, er, stimulus that Krugman demanded, that really wouldn't have worked and it would have wreaked even more havoc. But Krugman wouldn’t be in a position to say, “If you had only listened to me”.

In any event, I don’t think the general public buys this “stimulus” nonsense anyway. The way to sell anti-Keynesianism to the public is to remind them that Keynesianism doesn’t seem to make any sense BECAUSE IT DOESN’T MAKE ANY SENSE. And, in fact, it is the CAUSE of our problems.

"The size of the stimulus was determined by the President's economic team - at the time, did Romer, Summers, et al argue that it should have been larger? No, they did not. "

Actually, I'm pretty sure the size of the stimulus was one of the reasons why Romer quit.

"The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

For starters, the statists still refuse to prove that a market economy stalls out because a lack of debt and/or money dilution. That's because there is no evidence of such a stalling out, but the debt and money dilution statist advocate sure cause the economy to stall out.

Further, seizing money from the private sector, where investment can be guided by economic calculation, for forced transfer to the "public" (donut eating) sector, traps resources in a milieu where economic calculation is impaired, or more likely impossible.

"Stimulus" is attempting to solve a problem that does not exist and is, in fact, the CAUSE of the problem.

Now that you've given me an entirely different way of looking at public debt (and thank you), do you have sources that tell you optimal ways to manage the level of public debt/private savings, hopefully with some historical back testing?

I have ordered but not yet received Wray's Understanding Modern Money.

APs way (chartalism) seems to me to be nothing more than an accounting trick designed to justify a desired goal (government intervention).

its flawed for the same reasons that keynsianism is, ignoring scarcity and human action, while viewing the economy as an amorphous blob.

only chartalism, as AP has pointed out an annoying number of times, links private savings with government spending, again treating 'savings' as an amorphous blob where the levels are the only characteristics that matters.

In his theory, all that matters is that government has a temporary deficit. He thinks government spending will accomplish this, but obviously he would endorse tax cuts over spending because it's more politically feasible. Both of you think people need savings. If you're worried about the deficit, cut the the military budget after the economy recovers or now preferably, which AP Lerner would also endorse. You think trimming the military budget is an unrealistic prospect? So is ending the FED. Anyway, AP Lerner doesn't very happy about the FED either. I think he even said the FED was to blame for bubbles like you guys. Most of what I read from him about the monetary system has not been endorsement. He has just been trying to explain how the monetary system works. It has been positive analysis, not normative.

I don't know why you want to demonize the guy. In the end of the day, you could both agree that all that's needed is massive tax cuts.

well, thats not entirely accurate. im not saying that savings are bad, i just refuse to accept that premise that any entity should be persuading individuals, one way or another. i believe that individuals need to do whatever they need to do to put themselves in a better financial position. if that mean saving, fine. if that means borrowing to buy capital, fine. consumption will return when people are more stable.

to you and/or AP, i have a question; does it matter at all WHO "saves"? is there any economic difference, because APs formula is based on the premise that it doesnt matter.

"If you're worried about the deficit, cut the the military budget after the economy recovers or now preferably"

im not out to demonize the guy. ive read what he has to say, and given it honest consideration. i just think its wrong, from the standpoint of whats right, not what is. thats really where the gap lies. Prof. Anderson and the other austrians have more or less argued right and wrong, and often from the logical end of Krugmans viewpoints. AP has argued procedure and accounting methods. that said, i really cant stand his uppity attitude, and have knowingly come across as hating the guy, but again, i HAVE given his views honest consideration.

"In the end of the day, you could both agree that all that's needed is massive tax cuts."

WRONG. at the end of the day, we need massive SPENDING AND TAX CUTS, and to allow the free market to calculate where resources are best distributed. it has been stated several times before; government spending (intervention) lends to miscalculations and misallocations of resources.

Reagaon and Bush Sr. also had massive deficits, yet the economy recovered quickly during the two recessions before the Clinton years. Perhaps the government spending will slow down potential "real growth" in the long run, but I think it's stretch to think the immediate problem right now is keeping government spending in the same level temporarily as in the bush years. Once employment improves, gut the military budget all you want to free resources for the private sector. Whatever debate about the rest of the government spending and its role, could be left after recovery because that's not the immediate problem.

What you're saying isn't anything different from what AP Lerner is saying. Lower taxes to and people will do what they wish with their money and reallocate as needed. Increase savings so the market could figure it out.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).